Lands' End Issues 'Going Concern' Warning as it Looks to Refinance Debt

Dive Brief:

With debt maturities looming next year, Lands' End acknowledged that there is "substantial doubt" about the company's ability to survive over the next 12 months.

The company is working to replace its term loan financing, which could put to rest those doubts. "Due to the Company's recent trends of profitable growth, management believes that it will be able to refinance the Term Loan Facility on acceptable terms despite the challenging financial environment reflecting the COVID-19 pandemic," Lands' End said in a securities filing.

The clothing seller made the disclosure in its report on the first quarter, during which Lands' End revenue fell more than 17% to $217 million while operating loss grew more than five times over.

Dive Insight:

Lands' End joins a growing list of retailers to issue similar "going concern" warnings, an accounting requirement the most recent version of which went into effect a few years ago. Since March, Stein Mart, RTW Retailwinds, Francesca's, J. Jill and GNC, among others, have included the language in their filings with the Securities and Exchange Commission. Two of those companies, GNC and RTW Retailwinds, have filed for bankruptcy in the months after issuing the warnings. And those are just the publicly traded retailers that have to file the disclosure with the SEC.

While all those retailers named above entered the year with financial and competitive travails of varying degree and kind, all of their situations have been made more precarious by the COVID-19 pandemic. "COVID-19" appears more than 40 times in Lands' End's quarterly report. Some of those mentions regarded direct actions Lands' End took as it closed its stores and furloughed corporate and store staff to preserve cash. The company also added $25 million in capacity to its ABL facility, which could come due in January depending on whether Lands' End can extend, pay or refinance its term loan. 

COVID-19 also disrupted financial markets, though to some extent they have rebounded since March, giving some retailers the ability to restructure old or issue new debt. For Lands' End, refinancing its loans due next year is key to staying out of bankruptcy court.

S&P Global downgraded Lands' End in June citing concerns around the maturity dates and the need to refinance in a volatile financial landscape. Since then, Lands' End has continued talking with potential lenders around a solution. In its Q1 report, the company said it is in "active discussions and negotiations" around refinancing and "has received non-binding term sheets from multiple investors" that would allow it to refinance its term loan debt. The company also said that its "financial forecasts indicate sufficient liquidity for at least the next twelve months under the terms of these proposals."

That all depends on the company reaching a deal, and also on the efficacy of its financial forecasts. In a world still disrupted by the spread of COVID-19, forecasting consumer demand has been made incredibly difficult, which has ripple effects on buying, cash flow and just about every other aspect of business.  

Lands' End's sales and profits have fluctuated in recent years, in part because of its breakup with former owner Sears. In February, before the pandemic hit, Lands' Ends' revenue and comparable store sales were up by double digits year over year. The company has the advantage of already being oriented online and in direct-to-consumer channels beyond the store, which may have made its Q1 revenue decline less drastic than that of some of its retail and apparel peers.